Kay Properties & Investments DST Essentials Podcast on the DST Full Cycle Process

Nick Snyder:

Hi everyone. Thank you for joining us for the Kay Properties: 1031 Exchange, DST Investment Conference call. We'll begin with the risks and disclosures. DST 1031 properties are only available to accredited investors generally described as having a net worth of over one million dollars exclusive primary residents and accredited entities only, generally described as having an entity owned entirely by accredited investors or an entity with gross assets of over five million dollars. If you are unsure, if you are an accredited investor and/or accredited entity, please verify with your CPA and attorney. The information herein has been prepared for educational purposes only and does not constitute any offer to purchase securities, DST properties and/or real estate. Such offers are only to be made through private placement memorandums, PPMs, which are solely available to accredited investors and accredited entities. Securities are offered through Phoenix, member FINRA, SIPC, Phoenix and Kay Properties are separate entities. This material is not to be interpreted as tax with legal advice. Please speak with your own tax and legal advisors for advice and guidance guiding your particular situation.

There are risks that are associated with investing in real estate and Delaware statutory trust properties, including but not limited to, loss of entire investment principle, declining market values, tenant vacancies and illiquidity. Investors can read PPM carefully before investing, paying special attention to the risk section, because investors' situations and objectives vary, this information is not intended to indicate suitability for any particular investor. Please speak with your CPA and attorney to determine if an investment in real estate and DST properties is suitable for your particular situation and circumstances. Past performance is not indicative of future returns, potential cash flows returns, appreciation are not guaranteed and could be lower than anticipated. Thank you everyone for listening in, and now I'd like to turn the call over to Brent Wilson, vice President of Kay Properties and Investments

Brent Wilson:

Hello everyone and thank you so much for joining us today. We are going to have a great time today. We on DST Essentials with Kay Properties where we'll take an in-depth look at many of the recurring themes and nuances of the Delaware Statutory Trust investment process. In this series, we will be interviewing many members of the Kay Properties team who each bring their own unique and valuable perspectives that they've formed over their vast transactional experience in the DST investment landscape. Before we introduce our guests today, I'm going to start with a little bit about Kay Properties. Kay Properties is a national Delaware statutory trust investment firm. The kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies that we work with, this includes custom DSTs only available to Kay clients and an active DST secondary market listings.

Kay Properties team members collectively have over 400 years of real estate experience, are licensed in all 50 states and have participated in over 30 billion dollars worth of DST 1031 investments. I'm excited to have our very own Carmine Galimi on the call today. Carmine serves as Senior Vice President at Kay Properties and Investments, assisting accredited investors with Delaware Statutory Trust 1031 Exchange investments throughout the country. Carmine is a seasoned investment professional with more than 20 years of experience working with some of Wall Street's most prestigious investment firms. He has extensive experience working with both private and institutional investors and is considered a specialist within the DST industry. Today will probably be a little quicker call, we're going to be going over what it means for a DST to go full cycle , specifically unpacking how this event comes to be and highlighting the various options investors have as a result. Carmine welcome to the call and thank you so much for being with us.

Carmine Galimi:

Thank you very much Brent, and thank you all for taking a little bit of time out of your Friday afternoon or Friday morning, depending on where you are in the country, to listen in, excuse me, on our weekly DST Essentials with Kay Properties.

Brent Wilson:

Fantastic. So let's dig in just kind of understanding this term full cycle, can you please describe what is meant here and how exactly this comes about within a DST property?

04:35 – “Full Cycle” Term Explained

Carmine Galimi:

Absolutely. Thank you again, Brent. So the term full cycle simply means the life of a DST, from the time of launch when the sponsor company or asset manager purchases the property, closes on the property, where the Delaware Statutory Trust takes the title and the offering is made available to investors for investment, that point in time until the property is sold in the future, that length of time is called the full cycle term. A DST realizes its full cycle once the... Well, it's based on a number of factors, once a business plan and each DST has its own business plan, once the business plan is achieved and is primed for sale and then sold, that's one way a DST exits or a DST is sold. Another way is unsolicited offers, just like any type of real estate that you hold, unsolicited offers may come in where you decide to turn around and sell a property, maybe not in the exact timeframe that you were initially considering holding.

There's also regular marketing efforts on an exit that determines a DST going full cycle. The sponsor believes that it's time to sell based on market conditions and things of that nature, whether they feel that it's an opportune time to sell given the real estate market is in a strong position or vice versa, anticipation of a downturn where a sponsor would feel or believe that it's advantageous to sell the property at a specific time. Another reason is, or another way a full cycle event happens is through a 721 Exchange UPREIT , whereas the property is sold by the sponsor within a different division of the platform or of the company. If anyone has questions regarding 721 UPREIT, please reach out to your registered representative at Kay Properties to walk you through the process.

Brent Wilson:

Excellent answer, Carmine, thank you for that. So essentially, going full cycle means that the DST company, the sponsor company that has started this process with this property, has purchased and then at some point in the future, through any of those specific instances that you mentioned, will be selling the property. Is that right?

Carmine Galimi:

Exactly, yes. That's accurate. Correct.

Brent Wilson:

All right, fantastic. So what is actually the timeline that we typically see for how long the DST company is going to be looking to hold these properties?

07:50 – Delaware Statutory Trust Hold Periods

Carmine Galimi:

Great question. So the answer is, it depends. Well, I should say, on average historical DSTs that have gone full cycle, the average hold time is anywhere between five to 10 years depending on the property. Now there's different variables, nuances, things like that on what determines that.

Again, as I mentioned, each deal or each DST has its own business plan and therefore has its own exit strategy . Obviously a property needs to be held long enough to create value to justify a sale. Now this is all outlined in the Private Placement Memorandum or PPM . Each DST has its own private placement memo that every investor would have access to prior to any investment decision he or she makes. Now the length of time of the DST being held, like I mentioned, depends on the business plan being executed and what exit strategies therefore come about, but again, as I mentioned earlier, it also depends on market conditions and things like that. Investors should be aware that the DST is a 100% passive investment where the sponsor has complete control of the asset and complete control on how to manage the asset and then decide when to sell the asset. So it's to the discretion of the sponsor company on when the DST will begin the process of selling an in turn go full cycle.

Brent Wilson:

Wonderful. So typically looking at a five to 10 year cycle, are there any specific differences as to whether or not that might change based upon if the DST itself is debt free or if it has leverage on it?

10:02 – Full Cycle Variables Depending on Debt Free or Leveraged DSTs

Carmine Galimi:

Great question. The answer is yes, and let me break it out into two answers. Let's start with DSTs that have leverage or have debt on it. Usually, not always, but usually the loans are interest only loans, they're 10 year balloon loans. These loans cannot refinance during the life of the DST, therefore the properties have to be sold within the 10-year period. Now, within the lever DSTs embedded in the loan language or in the loan documents, there's usually some type of yield maintenance or deviance or prepaid penalties where if the loan is retired or paid off prior to a certain time, these extra costs kick in. So the sponsors are incentivized to hold the property at least past that timeframe depending on what it is, and again, each deal is unique. Now that doesn't necessarily mean that they will hold it longer than that initial timeframe.

Usually it could be three years, could be five years, could be seven years, and the reason why they wouldn't is, again, it depends on the business plan, market conditions and if the economics make sense to even sell the property before that time. So with the debt DSTs there's, I would say, less flexibility because lenders are involved. At the same time, on the debt free side, there's much more flexibility because there aren't any lenders involved, therefore the sponsors can decide when to sell, based on market conditions, based on business plans and things like that, there's no worry about prepaid penalties or deviance or yield maintenance, things like that. The average hold time on a debt free DST tends to be a little bit shorter historically.

Now that doesn't mean if the investor goes into a debt free DST tomorrow that it's going to be a short term hold, for 1031 exchange rules, as investors may or may not know, investments has to be held at a minimum time, two years, in order to have a successful exchange. So none of these deals would be sold in a year or something like that, but again, keep in mind that the debt free gives the sponsor much more flexibility where they're not forced to sell within a timeframe, and again, going back to the debt side, the deals have to be sold within that 10 year period regardless of market conditions. So there's just the less flexibility and that's why the deals that don't have any leverage tend to be much more conservative given the fact that there's a lack of leverage and no lenders involved determining at least part of the outcome.

Brent Wilson:

Wonderful. Yeah, thank you so much for that answer, that was great information to have, especially understanding, we're going to get into an investment like this, and this is a long term investment, I want to know what the potential timeline is actually going to be and understanding the differences between the debt and the debt free side, it definitely makes a difference for the investors as well. Can you actually talk us through what the process is for the investor? What does this look like from the investor's perspective?

14:10 – DST Investor Process

Carmine Galimi:

Sure. The way it works is, an investor goes into a DST, closes a DST by first off understanding the DST, the structure of it, by going through and reading the private placement memorandum, understanding the business plan, exit strategy that the sponsor plans on executing. Now again, there's certainly market conditions that come into play where sometimes business plans aren't fully executed prior to sale or prior to a deal going full cycle. So an investor will go into a DST, close on a DST and at some point in the future they will be notified by the sponsor company on their intentions to sell, whether it's, they're beginning to market the property for sale, because like I mentioned, this business plan was executed, market conditions called for marketing the property at that point in time, the sponsors will continue that communication with the investor along the way.

Sometimes, like I mentioned earlier, sponsors will receive unsolicited offers on properties where they weren't planning on selling, but the offers were too good to pass up or too good not to consider or engage or negotiate. Once the sponsors are under contract, the investors will be made aware and a timeframe would be given, 60 days, 90 days, what have you. So the investor will have ample time to prepare on doing another 1031 exchange, whether it's in DSTs or other investment properties or cashing out and paying the taxes, or paying their capital gains tax. There's instances where properties are marketed, unsolicited offers come in and just like anything else, the deal doesn't happen or the sale doesn't happen, whether it's agreement on price or other contingencies and things like that, that happens as well. I've seen sponsors market properties for sale and then take the properties off the market just because the interest wasn't where it made sense for them to sell.

There are instances where prospective buyers put down hard deposits, in that instance, likelihood of a sale or a transaction or a DST going full cycle is higher, but of course, none of this is guaranteed. The timeframe is given, the sponsors will ask investors if they do plan on doing another 1031 exchange to reach out to their qualified intermediaries to let them know the deals are going full cycle, and more often than not, but not always, a lot of these sponsors have other DSTs that are either in the market or about to launch where investors, especially if the performance has been well, investors can roll into another DST via 1031 exchange with that same sponsor. So there's different options that will be made available to investors or different scenarios as well, and I just want to be clear that investors will have ample time to make a decision, they're not going to be notified a day before or a week before or things like that.

If you as the investor purchase these DSTs through Kay Properties, Kay Properties will also be made aware of the deal going full cycle or the deal or the property being marketed for sale and the process along the way. So your Kay Properties representative would reach out to you, the investor, to let you know or to confirm that your investment is going full cycle. So not only is the investor made aware, but Kay Properties is made aware as well. There's been instances where personally, a sponsor would reach out to me and let me know that they're selling their property or their DST is going full cycle, you had these many investors within the deal, please reach out just to confirm, I would reach out, and some investors aren't even aware the deals going full cycle, whether they don't check their correspondence or a number of factors. So, again, not only the investors made aware, but also Kay Properties registered representatives are made aware as well.

Brent Wilson:

That sounds like, because of the options that are available, that this is kind of an ongoing relationship with the investors and us here at Kay Properties. Is that right?

19:42 – Kay Properties’ Ongoing Relationship with Clients

Carmine Galimi:

Yeah, and I just wanted just to add that in closing, investors who invest in DSTs within Kay Properties, the relationship doesn't end at that point, and it doesn't begin when the property is being marketed and sold in the future. Now, these investments are illiquid, they're 100% passive, there's no management involved and things like that, but that doesn't mean the relationship doesn't continue between the investor and your registered representative at Kay Properties. We're always made available, whether it's following up with different sponsors as it relates to tax documents or understanding the process when the DST does go full cycle, discussing market conditions and possibilities of properties being sold at a different point in time, that's initially stated in the PPM. So I just wanted to be clear that the relationship continues, and it's not only from the beginning when the DST is launched until when the deal reaches full cycle. There is that in between, and your registered rep here at Kay Properties will be available in any type of assistance that would be necessary.

Brent Wilson:

Thank you so much, Carmine for your time today. That was all great information that you shared with us. All the investors out there, everyone listening in, please log in to Kay Properties Marketplace, you can find it at www.kpi1031.com, to view 20 to 40, roughly, different DST offerings from over 25 different DST sponsors, or you can call into Kay Properties at (855) 899-4597 to speak with a licensed Kay registered representative who can walk you through all of your available options. Thank you Carmine again, that was fantastic, love talking with you today and to all of you out there, please join us next time on DST Essentials with Kay Properties, an in-depth look at various aspects of the DST 1031 exchange investment process.

Carmine Galimi:

Thank you, Brent. Thank you all. Enjoy your weekend.